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Potash Corp: Political Football

By David Dittman on November 4, 2010

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When it came down to the wire Canadian Prime Minister Stephen Harper stayed true to his own self and leading a majority Conservative government. And so after a streak of 1,637 approvals of foreign investments in the Great White North, Industry Canada late Wednesday afternoon rejected BHP Billiton’s (NYSE: BHP) USD130 per share, USD40 billion takeover bid for Potash Corp of Saskatchewan (TSX: POT, NYSE: POT).

There’s a great debate to be had among those who regard this as yet another ominous sign that countries are turning inward in the aftermath of the Great Recession and those who see in the decision an indication that good sense has prevailed among leaders who have to do battle with treacherous global competitors.

One thing that’s not open to question is that Potash Corp shareholders have lost. The Canadian government chased off the one suitor for Potash Corp that actually tabled a bid, engaging anew with others around the world already wrapped up in a resurgence of resource nationalism.

When the week dawned Industry Canada seemed on the verge of granting conditional approval, with rumored strings such as a requirement that BHP Billiton establish and maintain a potash headquarters in Saskatchewan, a commitment to a credible plan to develop the Jansen potash deposit, and an agreement that would preserve the province’s considerable royalty stream.

On Monday Canada’s National Post actually reported, relying on Conservative Party sources, that staff of Investment Canada, part of Industry Canada and responsible for reviews of foreign investment under the Investment Canada Act, had vetted, cleared and kicked the deal up, presumably to the politicos, Industry Minister Tony Clement and his boss, Prime Minister Harper, for a final decision.

The real political power, at least on this issue, rested in Saskatchewan with Premier Brad Wall, and it did so almost from the very moment the phrase “the people’s potash” passed his lips in August. His broad take certainly sounded better, even to bootstrapping western Canadians, than Harper’s view that this was a play by an Australia-based company for a US-owned company.

Late Wednesday came word that Saskatchewan would file a lawsuit against the federal government had it continued down its rumored path. It was a dare by Premier Wall to Prime Minister to take for granted Saskatchewan voters and honor his globalization masters or to protect the very things that make his political base strong.

Approving BHP’s takeover of provincial jewel Potash Corp meant alienating a critical bloc of voters in his western base, putting him farther away from that which he covets most. So, taking advantage of the ambiguities of the Investment Canada Act, Industry Minister Clement rejected BHP because he “is not satisfied that the proposed transaction is likely to be of net benefit to Canada.”

There’s a 30-day review period built into the process, so BHP theoretically has an opportunity to make an appeal or at least inquire as to the grounds for the decision. The world’s biggest miner had already promised to maintain current employment levels at Potash Corp and make Saskatoon, Saskatchewan, the base of its global potash operations. That left open the question of BHP’s plan to boost production and sacrifice on price, which would mean a significant–some estimates said as much as CAD2 billion a year–decline in royalty revenue for the province.

But also of benefit to Canada would have been BHP’s exploitation of the Jansen project and the exploration rights to more than 14,000 square kilometers of “highly prospective ground” in the Saskatchewan potash basin. Jansen is an estimated CAD12 billion undertaking that would have been considerably easier for BHP from cost standpoint had Industry Canada allowed it to move forward with Potash Corp for tax reasons.

Jansen is the most advanced project of BHP’s multiple development options in potash. Whether it goes forward is an open question. Ironic that BHP could still become a significant owner/operator/producer of precious Saskatchewan potash. How much sooner it could have done so and how many more Canadians would have been put to work are open questions, too, but ones that can never be answered.

Clement says his decision had nothing to do with politics. The facts and the public record on this matter suggests otherwise. Start with Saskatchewan’s 14 seats in the House of Commons, 13 of which are held by Harper’s Conservatives, or nearly 10 percent of the party’s 144 total. And a majority of Saskatchewanians–55 percent in a recent survey said they were “somewhat” or “strongly” opposed–are against BHP’s takeover of Potash Corp. Thirteen percent support the deal.

He’s had a difficult enough time scraping together enough seats in Ontario and Quebec to get him within 11 of a majority. Prime Minister Harper isn’t ready to backpedal on his domestic objective, even for the sake of international free trade.

As emerging markets, including China and India, continue their rampant pace of growth their needs for commodities hard and soft becomes more acute. They’ll try to hold onto the stuff they can find within their borders, and they’ll hunt high and low to import it.

Unique among the developed economies is Canada, with considerable export capacity for a lot of the resources China and India require to keep protean populations tranquil. Stable political institutions allow all Canadians to benefit from the country’s resource wealth. These institutions, it turns out, will defend its interests, as China, for example, is now defending rare-earth metals.

The role of government and the competition for resources form the foundation of The Rise of the State: Profitable Investing and Geopolitics in the 21st Century, a book I co-authored with Elliott Gue and Yiannis Mostrous. The bottom line is, even in a jurisdiction as investor-friendly as Canada, you have to be aware of politics and politicians and the way they fight to preserve the only institution they really care about: their own term in office.

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